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Beyond the False Dichotomy: The Public Interest and Value Creation.

Yesterday I started the first article in series exploring the issues raised by Lucian A. Bebchuk, Roberto Tallarita, both professors at Harvard Law School in their paper, THE ILLUSORY PROMISE OF STAKEHOLDER GOVERNANCE.

The professors, both advocates of maximising shareholder value as the purpose of a business, are highly critical of the growing shift to “stakeholderism” in both of the two forms of it that they identify: “Instrumental stakeholderism” (Enlightened Stakeholderism as others call it) and “pluralist stakeholderism.”

In the first article I noted that the professors “have made their position on the Shareholder v Stakeholder debate very clear. And in previous articles I have made my position clear. I think the shareholder v stakeholder argument is based on an entirely false dichotomy and the right focus should be the long-term success of the business itself”.

This series of articles uses the paper and the issues it raises to provide context to a series of four online conferences I am hosting as Founder and CEO of the Enlightened Enterprise Academy. A starting on MARCH 15th. BEYOND THE FALSE DICHOTOMY: ENDING THE SHAREHOLDER v STAKEHOLDER NONSENSE is the first theme. We have an excellent line-up of leading experts representing business, finance and investment, economics, academia and think tanks. DETAILS

In this first article exploring what professors Bebchuk and Tallarita say, I will explore their comments on “The rise of Stakeholderism” and, the “origins, evolution, and breadth of support” for it. I will focus on the “origins”, referring to the “early history of the U.S. corporation.”

The professors note, “recognition of the corporate form—and of its most important feature: limited liability—was strictly connected with the notion of public benefit” in this early form of the corporation, and “this idea was rooted in English precedent, which drew a distinction between enterprises of direct benefit to public welfare and those aimed at making private profits, and viewed only the former as deserving the privilege of corporate personhood.

They go on to say, “The argument, as transplanted into American legal thought and practice, was that limited liability was an extraordinary and undemocratic privilege, and only a prevailing public interest could justify it”.

But, “this early conception was gradually abandoned with the passing of general incorporation acts, which enabled enterprises to adopt the corporate form without previous authorization by the state”.

“At that point, corporate personhood was no longer a privilege individually received from the state but a form of business organization generally available to all enterprises”. And “by the beginning of the 1920s, the idea that the main purpose of the business corporation was to make profits for shareholders was widely accepted and sanctioned by case law.”

It would seem that this is the point at which things started to go wrong - when public interest was no longer the purpose of the corporation, and the main purpose became making profits for shareholders. The social contract business has with society, which grants it a license to operate, started to fracture. And, over time, the fractures have become major fault-line. However, the tectonic plates are shifting again, resulting in a tsunami of public and regulatory pressures and calls for radical reforms, towards stakeholderism as the professors call it.

Many of the most successful industrialists, particularly those driven by strong values such as the Quakers, achieved great success by building businesses that had a very strong commitment to creating public value and social cohesion. They invested in what we now call social capital, creating model villages with schools, hospitals, housing, libraries etc. They practiced the concept we now call Shared Value, paying workers above average rates. And they were active in the pursuit of progressive social reforms such as better workers rights, greater equality for women, voting rights, the end of slavery etc.

The most successful capitalists of the industrial revolution would be appalled by today's version of "Rentier Capitalism" as Martin Wolf, Chief Economist of the Financial Times Calls is. They would have been highly critical of short-term thinking and the focus on value extraction for shareholders in preference to re-investment in real value creation.

The faults our our current form of capitalism were clear long before Coivid19, but the pandemic and its impact on the economy and societal attitudes have exposed the problems and strengthened the demands for reform even more.

The crisis is greater and more widespread than that caused by the global banking crisis in 2007/8. It represents something closed to the crisis created by the Second World War. And any crisis situation leads to demands for change, and a willingness to accept far more radical changes than might be expected in normal times. This was expressed by Joseph P. Overton in what is called The Overton Window. According to Overton, the window frames the range of policies that a politician can recommend without appearing too extreme to gain or keep public office given the climate of public opinion at that time.

A crisis creates the need for greater social cohesion, so inequity and the injustice associated with extreme inequality are far less likely to be tolerated. It in this context we see demands for more equitable treatment of stakeholder groups and calls to “build back better”, for a “better new normal”, and for reforms of ways business and other institutions are governed. We also hear calls for a renewed social contract.

This situation has turned up the heat in the Shareholder v Stakeholder debate based, I argue, on an entirely false dichotomy. As I said in the previous article in this series , there is another way that can serve all interests. Some call it the “company centric” model, in which the business focuses on its own long-term success – and doing so requires that it treats all stakeholders, including shareholders, not equally but equitably. The stakeholders in this case include society. So, the public interest must also be served. This takes us back to something closer to the initial idea for the purpose of a corporation - that it should have a social purpose.

In my view, having a social purpose should not mean that corporations cannot make profits. It merely says that being granted a license to create profits requires it to also create public value. Today society is increasingly expecting this of corporations. And these demands are very likely to get ever stronger. They will have to be respected if the social contract is to be restored.

Those who attempt to reject this notion should be mindful of the fact serving ‘customers’ by meeting their needs is the only sustainable way to creating the value from which shareholders may earn profits. And, as Bebchuk and Tallarita state, “It is undeniable that, to effectively serve the goal of enhancing long-term shareholder value, corporate leaders should take into account stakeholder effects.” Or, as I prefer to rephrase this, “it is undeniable that, to effectively serve the goal of enhancing long-term shareholder value, corporate leaders should treat all stakeholders, including shareholders, equitably”, which is not the same as suggesting they should be treated equally.

In my view, “the concept of reciprocity is helpful. It would mean each stakeholder group receives the recognition it merits relative to its contribution to the long-term success of the business.” And this is a way to determine what “equitable” means in practice.


In the future articles in this series, I will be discussing the other issues raised by Bebchuk and Tallarita in their paper. This provides a very useful way of introducing the issues to be explored in the series of four Beyond the False Dichotomy Conferences. Summaries will be published for open access. The full articles will only be available to delegates to the conference.

Tickets for each one are ONLY £10. And TICKETS FOR THE FIRST CONFERENCE (MARCH 15th) ARE NOW AVAILABLE. The conferences are also supported by a private LinkedIn group for delegates.

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